Growth without Inflation

Economic Expansion to Full Employment

Is it possible to expand an economy right up to full productive capacity and full employment, then hold it there for ever? The answer in terms of current economic thinking is negative. The problem is that when government attempts to expand the economy to anywhere near full employment, the onset of inflation halts the process before it can reach its goal.

Inflation is an increase in price without a corresponding increase in value. If the price goes up for a better product that costs more to make, that is not inflation. But if a producer asks more tomorrow for the same product he sold for less yesterday, that is inflation.

Similarly with wages. More money for more or harder work is not inflation. Inflation is more money for doing exactly the same work.

The level of economic activity directly affects inflation.

When the economy is sluggish, producers and retailers find difficulty in moving their goods; they respond by introducing price reductions, incentives and special offers. As the economy expands and consumer demand expands, prices can be increased without damaging sales.

Similarly with wages. Employees are naturally reluctant to demand more money, or threaten strike action, in a time of high unemployment and with a lineup of job applicants outside the door. But when the economy approaches near-full employment and staff are hard to find, now's the time to demand that raise you've been wanting!

The price of goods and services on the market increases to match or exceed the value of credit available for their purchase. This is the dominant feature of a free market economy, and balancing the two highly desirable but conflicting goals of full employment with zero inflation, or stable money is the key to national economic management today.

So Government and/or the Central Bank expands the economy by lowering interest rates. But when near-capacity is reached in the more prosperous regions, inflation begins to rise, and the Central Bank attempts to control inflation by slowing down the economy with increased interest rates, thereby maintaining a level of permanent unemployment. Full employment and full productive use in a free-market economy is an economic and financial impossibility. Thus getting a job becomes a game of musical chairs. For every hundred job-seekers, there are only at best ninety-five jobs. Similarly producers will be competing to sell their goods to a market which has insufficient credit to purchase them.

Apart from fiscal dishonesty and irresponsibility (printing money to gold-plate the presidential palace), inflation is not a monetary, but a social factor. In hard times people behave themselves. When things get easier producers bump up prices, staff want pay increases. That is not an economic factor, just simple human nature.

The underlying economic factor which makes this situation possible is that pay and prices are settled by a form of disputation. The price is as much as the producer can get, or as little as the consumer is willing to pay. Similarly, the wage is as much as the employee can get, or as little as the employer can get away with.

This process is commonly known as free collective bargaining. But it is inherently unstable and subject to continuous upward pressure fuelled by the simple human desire for more. While the desire for more wealth and prosperity both personally and nationally is a very reasonable one, an economy and its participants should seek to increase their personal and collective prosperity by becoming more productive, by producing more and better goods tomorrow at less cost than yesterday, not by demanding more money for the same work or the same product.

The process of establishing pay, profits and prices by disputation results in friction, industrial disputes, loss of productivity…. and permanent under-employment. It represents a facet of anarchy, in that it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines and regulation.

Free Collective Bargaining combined with its corollary of totally unregulated market pricing is the key factor which prevents expansion to full employment. Furthermore, the continuing battle over Pay, Prices and Profits is a major drag on overall national prosperity, by causing dissension, mistrust, and a sense of exploitation in the workplace, and by ensuring that at any given time, the nation's economy is operating substantially below its potential capacity.

Pay, Profit and Price Stabilization

The ability to channel investment into areas of un- or under-employment offers the potential to expand the productive capacity of the economy to its maximum potential, that is to say, full employment.

Full employment has a number of advantages. A job is fundamental to life itself; without a job little else can be achieved. Without a foot on the ladder, there is no hope of mounting. Unemployment also puts demands on those who do have work, since they must pay taxes to finance welfare benefits. At the national level, unemployment represents a waste of productive potential. It is an immediate waste in that 5% unemployment is a 5% reduction in potential production. And it discourages labour-shedding productivity improvements, since those with jobs are afraid of losing them. Some economists have suggested that a degree of unemployment is essential, since a tight labour market can hold back economic development; on the contrary, employers and managers at a Japanese labour conference in 1991, at the height of Japan's period of full employment, were unanimous in that the shortage of labour at that time had forced them into increased labor-saving productivity and automation.

Despite the disadvantages of unemployment and the desirability of full productive use of all economic resources, the ability to expand an economy to full capacity cannot presently be realized, for as the economy expands to near-full employment, the danger of inflation causes the Central Bank to put the brakes on.

A potential solution to this contradiction already exists, and needs only to be applied on a national scale in order to bring justice, peace and prosperity to a fully employed economy.

For many years, since the 1930s i fact, government agencies and corporations large and small, have been using a system of job evaluation to evaluate the work each employee contributes. Each job is analyzed, and its essential characteristics and demands, such as training, responsibility, working conditions and physical/mental effort involved, are measured on a series of common scales. The job "value" is then directly related to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.

See, for example, South Tyneside Council's list of Job Factors.

Currently there are several such systems in use, well tried and working successfully. It would not be difficult to analyze and compare their different features in order to establish a single standard. This would become in effect a national standard of value for measuring the work element contained in a product or service, so that pay becomes a true reflection of the work required of a job.

Society already measures apples and petrol; it could hardly get along otherwise. Yet of all the things traded every day, work is the most important, and work is the one commodity we do not measure. A national standard would provide a point of reference, of justice indeed. Everyone would know how much they should get for the work they do, without hassle or argument or strike.

Labour evaluation can ensure remuneration stabilization. This process can be carried through to price stabilization.

A factory's, or a business's total costs consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labour added in the factory; and third, the costs of capital write-off, overheads and finance.

These are the costs of making a product, of supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price, there would be a direct and fair relationship between cost and price, and therefore between pay and purchasing power.

But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit. How is the net profit currently disposed of?

The prior destination for profits has traditionally been the investors, or shareholders, who provide the necessary investment. The other major destination for the disposal of company profit is re-investment, either in research and equipment or increased working capital. The advantage is that in-house or self-generated investment comes without future servicing cost or commitment to repay.

Business, particularly physical production, is continuously re-inventing itself, as research and on-site improvements, spurred by competition, develop new ways of making products better and cheaper. As productivity increases and products become cheaper to make, there should be some gain to society in the form of lower prices. But it is not only the customer who benefits from lower prices, the producer benefits too, as lower prices are reflected in increased sales.

In 1913 Henry Ford introduced the continuously moving assembly line. This move dramatically reduced production costs, which Ford astutely passed on in a corresponding price reduction. This not only increased sales, but left the competition way behind. The effect of simplification and scale was to move the price of a Model T down to $550 by 1914, when 248,30 were sold. By 1917, the price had been reduced even further, to $360, with the result that sales soared to 785,432. In 1920, Ford sold 1.25 million Model T's.

Lower costs, lower prices, increased sales, resulting in further productivity gains... a virtuous circle.

Pay, Profit and Price Evaluation: a fair wage, a fair price.
True Social Justice.

Great Britain: Heritage - Challenge

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